Could You Please Comment On The SharePlus equity product from Standard Bank, which was advertised lately? The main points from a brochure dated April are: a minimum R25 000 investment; the funds are fixed for 24 months with no early redemption; the investor receives the growth of the FTSE/JSE All Share index (Alsi), capped at 25 percent, plus the capital amount invested; only the capital amount will be returned if the Alsi remains flat or decreases in the period; and no fees or commissions.
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Jan-Carel Botha, a financial planner at Ultima Financial Planners in Pretoria and the Financial Planning Institute's Financial Planner of the Year for 2012, replies: The equity market is very volatile, so it is very dangerous to invest in this asset class if your intended investment period is only two years, unless your investment is guaranteed in some way.

A quick look at this product therefore does make it attractive. I could not get all the fine detail of this product, but from what I could gather from the brochure and by applying general investment considerations, I suggest you keep the following in mind: The product developer uses tranches (sums of money) to buy call and put options (the right but not the obligation to buy and sell a security at a particular price in the future) in the equity market that protect the downside of your investment. These options, however, also limit the upside of the investment, hence the capped 25-percent growth over two years. When structuring these options, the product developer charges a fee, usually around one to two percent. This cost, together with the actual cost of the option, makes it a far more expensive structure than the brochure suggests. Ultimately the cost will reduce the return. Your growth capped at 25 percent (cumulative)over two years basically implies an average return of 11.8 percent per year. With inflation at, say, six percent per year, the real return would be 5.8 percent per year. Suddenly, the 25 percent as a single, stand-out marketing number might not look that attractive. But, with no risk of losing your capital over two years, this number again becomes attractive. Remember this is the best-case scenario.

Most market analysts and economists agree that the next five to 10 years will in all likelihood see much lower average returns than we have been used to. The consensus for equity investment returns is currently "a high single figure to low double figures". Let's say then, 10 percent. Looking at the Alsi over time, the average dividend yield was around four percent. This implies that the near-term outlook at this stage is six percent. Remember that the Alsi performance does not capture the dividends for the shares but only the capital appreciation.

What you must therefore understand from this product is that you will not get the dividends but only the capital growth. This, together with the cost of the structure explained above, significantly reduces your chances of yielding a return close to the maximum 11.8 percent. The chances that history will exactly repeat itself are basically zero, but it would be very interesting to see what the actual returns of a well-known equity fund would be over time, what your chances of losing money over two years would be, and the average return over two years. Let's look at a wellknown equity fund, the Allan Gray Equity Fund. From the graph (left) you can see that, as a veryworst-case scenario, you would have had a negative return of around 12 percent over two years, but if you had kept the investment for only six months longer in this extreme event, you would not have lost any of your capital.

The upside average scenario speaks for itself. This should not be used to predict the future, but does give some perspective on the alternative option of investing in a normal equity unit trust instead. Sugendhree Reddy, head of personal markets at Standard Bank South Africa, replies: Standard Bank aims to provide customers with an array of options for investing and building their wealth, suitable to different stages of their lives, and SharePlus is one of the investment products available. [The financial adviser's reply] states all the facts relating to the product, and it is worthwhile reiterating that no fees are charged on the account that will eat into the customer's returns. As advertised in the media, the initial tranche will end in June. Future tranches may be expected, depending on the viability of the first tranche.

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